TEXTRON INC, 10-K filed on 2/25/2020
Annual Report
v3.19.3.a.u2
Document and Entity Information - USD ($)
$ in Billions
12 Months Ended
Jan. 04, 2020
Feb. 08, 2020
Jun. 29, 2019
Document and Entity Information      
Document Type 10-K    
Document Annual Report true    
Document Period End Date Jan. 04, 2020    
Document Transition Report false    
Entity File Number 1-5480    
Entity Registrant Name Textron Inc    
Entity Incorporation, State or Country Code DE    
Entity Tax Identification Number 05-0315468    
Entity Address, Address Line One 40 Westminster Street    
Entity Address, City or Town Providence    
Entity Address, State or Province RI    
Entity Address, Postal Zip Code 02903    
City Area Code 401    
Local Phone Number 421-2800    
Title of 12(b) Security Common Stock — par value $0.125    
Trading Symbol TXT    
Security Exchange Name NYSE    
Entity Current Reporting Status Yes    
Entity Well-known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Interactive Data Current Yes    
Entity Filer Category Large Accelerated Filer    
Entity Small Business false    
Entity Emerging Growth Company false    
Entity Shell Company false    
Entity Public Float     $ 12.2
Entity Common Stock, Shares Outstanding   228,049,518  
Entity Central Index Key 0000217346    
Current Fiscal Year End Date --01-04    
Document Fiscal Year Focus 2019    
Document Fiscal Period Focus FY    
Amendment Flag false    
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Consolidated Statements of Operations - USD ($)
$ in Millions
12 Months Ended
Jan. 04, 2020
Dec. 29, 2018
Dec. 30, 2017
Revenues      
Total revenues $ 13,630 $ 13,972 $ 14,198
Costs, expenses and other      
Cost of sales 11,406 11,594 11,827
Selling and administrative expense 1,152 1,275 1,334
Interest expense 171 166 174
Special charges 72 73 130
Non-service components of pension and postretirement income, net (113) (76) (29)
Gain on business disposition   (444)  
Total costs, expenses and other 12,688 12,588 13,436
Income from continuing operations before income taxes 942 1,384 762
Income tax expense 127 162 456
Income from continuing operations 815 1,222 306
Income from discontinued operations, net of income taxes     1
Net income $ 815 $ 1,222 $ 307
Earnings per share from continuing operations      
Basic (in dollars per share) $ 3.52 $ 4.88 $ 1.15
Diluted (in dollars per share) $ 3.50 $ 4.83 $ 1.14
Manufacturing      
Revenues      
Total revenues $ 13,564 $ 13,906 $ 14,129
Finance      
Revenues      
Finance Revenue $ 66 $ 66 $ 69
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Consolidated Statements of Comprehensive Income - USD ($)
$ in Millions
12 Months Ended
Jan. 04, 2020
Dec. 29, 2018
Dec. 30, 2017
Consolidated Statements of Comprehensive Income      
Net income $ 815 $ 1,222 $ 307
Other comprehensive income (loss), net of taxes:      
Pension and postretirement benefits adjustments, net of reclassifications (84) (74) 109
Foreign currency translation adjustments, net of reclassifications (4) (43) 107
Deferred gains (losses) on hedge contracts, net of reclassifications 3 (13) 14
Other comprehensive income (loss) (85) (130) 230
Comprehensive income $ 730 $ 1,092 $ 537
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Consolidated Balance Sheets - USD ($)
$ in Millions
Jan. 04, 2020
Dec. 29, 2018
Assets    
Inventories $ 4,069 $ 3,818
Property, plant and equipment, net 2,527 2,615
Finance receivables, net 682 760
Total assets 15,018 14,264
Liabilities    
Total liabilities 9,500 9,072
Shareholders' equity    
Common stock (228.4 million and 238.2 million shares issued, respectively, and 228.0 million and 235.6 million shares outstanding, respectively) 29 30
Capital surplus 1,674 1,646
Treasury stock (20) (129)
Retained earnings 5,682 5,407
Accumulated other comprehensive loss (1,847) (1,762)
Total shareholders' equity 5,518 5,192
Total liabilities and shareholders' equity 15,018 14,264
Manufacturing group    
Assets    
Cash and equivalents 1,181 987
Accounts receivable, net 921 1,024
Inventories 4,069 3,818
Other current assets 894 785
Total current assets 7,065 6,614
Property, plant and equipment, net 2,527 2,615
Goodwill 2,150 2,218
Other assets 2,312 1,800
Total assets 14,054 13,247
Liabilities    
Current portion of long-term debt 561 258
Accounts payable 1,378 1,099
Other current liabilities 1,907 2,149
Total current liabilities 3,846 3,506
Other liabilities 2,288 1,932
Long-term debt 2,563 2,808
Debt 3,124 3,066
Total liabilities 8,697 8,246
Finance group    
Assets    
Cash and equivalents 176 120
Finance receivables, net 682 760
Other assets 106 137
Total assets 964 1,017
Liabilities    
Other liabilities 117 108
Debt 686 718
Total liabilities $ 803 $ 826
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Consolidated Balance Sheets (Parenthetical) - shares
shares in Thousands
Jan. 04, 2020
Dec. 29, 2018
Consolidated Balance Sheets    
Common stock, shares issued 228,400 238,200
Common stock, shares outstanding 227,956 235,621
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Consolidated Statements of Shareholders' Equity - USD ($)
$ in Millions
Common Stock
Capital Surplus
Treasury Stock
Retained Earnings
Accumulated Other Comprehensive Loss
Total
Beginning Balance at Dec. 31, 2016 $ 34 $ 1,599   $ 5,546 $ (1,605) $ 5,574
Increase (Decrease) in Stockholders' Equity            
Net income       307   307
Other comprehensive income         230 230
Dividends declared       (21)   (21)
Share-based compensation activity   139       139
Purchases of common stock     $ (582)     (582)
Retirement of treasury stock (1) (69) 534 (464)    
Ending Balance at Dec. 30, 2017 33 1,669 (48) 5,368 (1,375) 5,647
Increase (Decrease) in Stockholders' Equity            
Net income       1,222   1,222
Other comprehensive income         (130) (130)
Reclassification of stranded tax effects       257 (257)  
Dividends declared       (20)   (20)
Share-based compensation activity   166       166
Purchases of common stock     (1,783)     (1,783)
Retirement of treasury stock (3) (189) 1,702 (1,510)    
Adoption of ASC 606 | ASC 606       90   90
Ending Balance at Dec. 29, 2018 30 1,646 (129) 5,407 (1,762) 5,192
Increase (Decrease) in Stockholders' Equity            
Net income       815   815
Other comprehensive income         (85) (85)
Dividends declared       (18)   (18)
Share-based compensation activity   117       117
Purchases of common stock     (503)     (503)
Retirement of treasury stock (1) (89) 612 (522)    
Ending Balance at Jan. 04, 2020 $ 29 $ 1,674 $ (20) $ 5,682 $ (1,847) $ 5,518
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Consolidated Statements of Shareholders' Equity (Parenthetical) - $ / shares
12 Months Ended
Jan. 04, 2020
Dec. 29, 2018
Dec. 30, 2017
Consolidated Statements of Shareholders' Equity      
Dividends per share of common stock $ 0.08 $ 0.08 $ 0.08
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Consolidated Statements of Cash Flows - USD ($)
$ in Millions
12 Months Ended
Jan. 04, 2020
Dec. 29, 2018
Dec. 30, 2017
Cash flows from operating activities      
Net income $ 815 $ 1,222 $ 307
Less: Income from discontinued operations, net of income taxes     1
Income from continuing operations 815 1,222 306
Non-cash items:      
Depreciation and amortization 416 437 447
Gain on business disposition   (444)  
Deferred income taxes 89 49 346
Asset impairments 15 48 47
Other, net 79 102 90
Changes in assets and liabilities:      
Accounts receivable, net 99 50 (236)
Inventories (292) 41 412
Other assets (37) (88) (44)
Accounts payable 280 (63) (156)
Other liabilities (348) (223) (113)
Income taxes, net (83) (33) 78
Pension, net (62) (14) (277)
Captive finance receivables, net 45 22 67
Other operating activities, net   3 (4)
Net cash provided by (used in) operating activities of continuing operations 1,016 1,109 963
Net cash used in operating activities of discontinued operations (2) (2) (27)
Net cash provided by (used in) operating activities 1,014 1,107 936
Cash flows from investing activities      
Capital expenditures (339) (369) (423)
Net proceeds from corporate-owned life insurance policies 2 110 17
Net proceeds from business disposition   807  
Net cash used in acquisitions (2) (23) (331)
Finance receivables repaid 48 27 32
Other investing activities, net 25 68 60
Net cash provided by (used in) investing activities (266) 620 (645)
Cash flows from financing activities      
Proceeds from long-term debt 301   1,036
Principal payments on long-term debt and nonrecourse debt (303) (131) (841)
Purchases of Textron common stock (503) (1,783) (582)
Proceeds from exercise of stock options 24 74 52
Dividends paid (18) (20) (21)
Other financing activities, net (3) (4) (4)
Net cash used in financing activities (502) (1,864) (360)
Effect of exchange rate changes on cash and equivalents 4 (18) 33
Net increase (decrease) in cash and equivalents 250 (155) (36)
Cash and equivalents at beginning of year 1,107 1,262 1,298
Cash and equivalents at end of year 1,357 1,107 1,262
Manufacturing group      
Cash flows from operating activities      
Net income 793 1,198 248
Less: Income from discontinued operations, net of income taxes     1
Income from continuing operations 793 1,198 247
Non-cash items:      
Depreciation and amortization 410 429 435
Gain on business disposition   (444)  
Deferred income taxes 91 54 390
Asset impairments 15 48 47
Other, net 79 97 94
Changes in assets and liabilities:      
Accounts receivable, net 99 50 (236)
Inventories (319) 45 422
Other assets (34) (87) (43)
Accounts payable 280 (63) (156)
Other liabilities (352) (219) (108)
Income taxes, net (90) (20) 119
Pension, net (62) (14) (277)
Dividends received from Finance group 50 50  
Other operating activities, net   3 (4)
Net cash provided by (used in) operating activities of continuing operations 960 1,127 930
Net cash used in operating activities of discontinued operations (2) (2) (27)
Net cash provided by (used in) operating activities 958 1,125 903
Cash flows from investing activities      
Capital expenditures (339) (369) (423)
Net proceeds from corporate-owned life insurance policies 2 110 17
Net proceeds from business disposition   807  
Net cash used in acquisitions (2) (23) (331)
Other investing activities, net 10 14 9
Net cash provided by (used in) investing activities (329) 539 (728)
Cash flows from financing activities      
Proceeds from long-term debt 301   992
Principal payments on long-term debt and nonrecourse debt (252) (5) (704)
Purchases of Textron common stock (503) (1,783) (582)
Proceeds from exercise of stock options 24 74 52
Dividends paid (18) (20) (21)
Other financing activities, net 9 (4) (3)
Net cash used in financing activities (439) (1,738) (266)
Effect of exchange rate changes on cash and equivalents 4 (18) 33
Net increase (decrease) in cash and equivalents 194 (92) (58)
Cash and equivalents at beginning of year 987 1,079 1,137
Cash and equivalents at end of year 1,181 987 1,079
Finance group      
Cash flows from operating activities      
Net income 22 24 59
Income from continuing operations 22 24 59
Non-cash items:      
Depreciation and amortization 6 8 12
Deferred income taxes (2) (5) (44)
Other, net   5 (4)
Changes in assets and liabilities:      
Other assets (3) (1) (1)
Other liabilities 4 (4) (5)
Income taxes, net 7 (13) (41)
Net cash provided by (used in) operating activities of continuing operations 34 14 (24)
Net cash provided by (used in) operating activities 34 14 (24)
Cash flows from investing activities      
Finance receivables repaid 277 226 273
Finance receivables originated (184) (177) (174)
Other investing activities, net 42 50 41
Net cash provided by (used in) investing activities 135 99 140
Cash flows from financing activities      
Proceeds from long-term debt     44
Principal payments on long-term debt and nonrecourse debt (51) (126) (137)
Dividends paid (50) (50)  
Other financing activities, net (12)   (1)
Net cash used in financing activities (113) (176) (94)
Net increase (decrease) in cash and equivalents 56 (63) 22
Cash and equivalents at beginning of year 120 183 161
Cash and equivalents at end of year $ 176 $ 120 $ 183
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Summary of Significant Accounting Policies
12 Months Ended
Jan. 04, 2020
Summary of Significant Accounting Policies  
Summary of Significant Accounting Policies

Note 1. Summary of Significant Accounting Policies

Principles of Consolidation and Financial Statement Presentation

Our Consolidated Financial Statements include the accounts of Textron Inc. and its majority-owned subsidiaries.  Our financings are conducted through two separate borrowing groups. The Manufacturing group consists of Textron Inc. consolidated with its majority-owned subsidiaries that operate in the Textron Aviation, Bell, Textron Systems and Industrial segments. The Finance group, which also is the Finance segment, consists of Textron Financial Corporation (TFC) and its consolidated subsidiaries. We designed this framework to enhance our borrowing power by separating the Finance group. Our Manufacturing group operations include the development, production and delivery of tangible goods and services, while our Finance group provides financial services. Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance. To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the Consolidated Financial Statements.

Our Finance group provides financing primarily to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters manufactured by our Manufacturing group, otherwise known as captive financing.  In the Consolidated Statements of Cash Flows, cash received from customers is reflected as operating activities when received from third parties.  However, in the cash flow information provided for the separate borrowing groups, cash flows related to captive financing activities are reflected based on the operations of each group.  For example, when product is sold by our Manufacturing group to a customer and is financed by the Finance group, the origination of the finance receivable is recorded within investing activities as a cash outflow in the Finance group’s statement of cash flows.  Meanwhile, in the Manufacturing group’s statement of cash flows, the cash received from the Finance group on the customer’s behalf is recorded within operating cash flows as a cash inflow.  Although cash is transferred between the two borrowing groups, there is no cash transaction reported in the consolidated cash flows at the time of the original financing.  These captive financing activities, along with all significant intercompany transactions, are reclassified or eliminated in consolidation.

At the beginning of 2019, we adopted Accounting Standards Update (ASU) No. 2016-02, Leases (ASC Topic 842), which requires lessees to recognize all leases with a term greater than 12 months on the balance sheet as right-of-use assets and lease liabilities. Upon adoption, the most significant impact was the recognition of $307 million in right-of-use assets and lease liabilities for operating leases, while our accounting for finance leases remained unchanged. We applied the provisions of this standard to our existing leases at the adoption date using a retrospective transition method and did not adjust comparative periods. The cumulative transition adjustment to retained earnings was not significant and the adoption had no impact on our earnings or cash flows. We elected the practical expedients permitted under the transition guidance, which allowed us to carryforward the historical lease classification and to apply hindsight when evaluating options within a contract, resulting in the extension of the lease term for certain of our existing leases.

We adopted ASU No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606) and its related amendments, collectively referred to as ASC 606  at the beginning of 2018. We adopted ASC 606 using the modified retrospective transition method applied to contracts that were not substantially complete at the end of 2017. We recorded a $90 million adjustment to increase retained earnings to reflect the cumulative impact of adopting this standard at the beginning of 2018, primarily related to certain long-term contracts our Bell segment has with the U.S. Government that converted to the cost-to-cost method for revenue recognition. The comparative information for 2017 included in our financial statements and notes was not restated and is reported under the accounting standards in effect at that time based on the policies described in this note.

Collaborative Arrangements

Our Bell segment has a strategic alliance agreement with The Boeing Company (Boeing) to provide engineering, development and test services related to the V-22 aircraft, as well as to produce the V-22 aircraft, under a number of separate contracts with the U.S. Government (V-22 Contracts).  The alliance created by this agreement is not a legal entity and has no employees, no assets and no true operations.  This agreement creates contractual rights and does not represent an entity in which we have an equity interest.  We account for this alliance as a collaborative arrangement with Bell and Boeing reporting costs incurred and revenues generated from transactions with the U.S. Government in each company’s respective income statement.  Neither Bell nor Boeing is considered to be the principal participant for the transactions recorded under this agreement.  Profits on cost-plus contracts are allocated between Bell and Boeing on a 50%-50% basis.  Negotiated profits on fixed-price contracts are also allocated 50%-50%; however, Bell and Boeing are each responsible for their own cost overruns and are entitled to retain any cost underruns.  Based on the contractual arrangement established under the alliance, Bell accounts for its rights and obligations under the specific requirements of the V-22 Contracts allocated to Bell under the work breakdown structure.  We account for all of our rights and obligations, including warranty, product and any contingent liabilities, under the specific requirements of the V-22 Contracts allocated to us under the agreement. Revenues and cost of sales reflect our performance under the V-22 Contracts with revenues recognized using the cost-to-cost method upon the

adoption of ASC 606. We include all assets used in performance of the V-22 Contracts that we own and all liabilities arising from our obligations under the V-22 Contracts in our Consolidated Balance Sheets.

Use of Estimates

We prepare our financial statements in conformity with generally accepted accounting principles, which require us to make estimates and assumptions that affect the amounts reported in the financial statements.  Actual results could differ from those estimates.  Our estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the Consolidated Statements of Operations in the period that they are determined.

Revenue Recognition for 2019 and 2018

With the adoption of ASC 606 at the beginning of 2018, revenue is recognized when control of the goods or services promised under the contract is transferred to the customer either at a point in time (e.g., upon delivery) or over time (e.g., as we perform under the contract).  We account for a contract when it has approval and commitment from both parties, the rights and payment terms of the parties are identified, the contract has commercial substance and collectability of consideration is probable.  Contracts are reviewed to determine whether there is one or multiple performance obligations. A performance obligation is a promise to transfer a distinct good or service to a customer and represents the unit of accounting for revenue recognition. For contracts with multiple performance obligations, the expected consideration, or the transaction price, is allocated to each performance obligation identified in the contract based on the relative standalone selling price of each performance obligation.  Revenue is then recognized for the transaction price allocated to the performance obligation when control of the promised goods or services underlying the performance obligation is transferred. Contract consideration is not adjusted for the effects of a significant financing component when, at contract inception, the period between when control transfers and when the customer will pay for that good or service is one year or less.

Commercial Contracts

The majority of our contracts with commercial customers have a single performance obligation as there is only one good or service promised or the promise to transfer the goods or services is not distinct or separately identifiable from other promises in the contract.  Revenue is primarily recognized at a point in time, which is generally when the customer obtains control of the asset upon delivery and customer acceptance.  Contract modifications that provide for additional distinct goods or services at the standalone selling price are treated as separate contracts.

For commercial aircraft, we contract with our customers to sell fully outfitted fixed-wing aircraft, which may include configuration options.  The aircraft typically represents a single performance obligation and revenue is recognized upon customer acceptance and delivery. For commercial helicopters, our customers generally contract with us for fully functional basic configuration aircraft and control is transferred upon customer acceptance and delivery.  At times, customers may separately contract with us for the installation of accessories and customization to the basic aircraft. If these contracts are entered into at or near the same time of the basic aircraft contract, we assess whether the contracts meet the criteria to be combined.  For contracts that are combined, the basic aircraft and the accessories and customization, are typically considered to be distinct, and therefore, are separate performance obligations.  For these contracts, revenue is recognized on the basic aircraft upon customer acceptance and transfer of title and risk of loss, and on the accessories and customization, upon delivery and customer acceptance.  We utilize observable prices to determine the standalone selling prices when allocating the transaction price to these performance obligations.

The transaction price for our commercial contracts reflects our estimate of returns, rebates and discounts, which are based on historical, current and forecasted information.  Amounts billed to customers for shipping and handling are included in the transaction price and generally are not treated as separate performance obligations as these costs fulfill a promise to transfer the product to the customer.  Taxes collected from customers and remitted to government authorities are recorded on a net basis.

We primarily provide standard warranty programs for products in our commercial businesses for periods that typically range from one to five years. These assurance-type programs typically cannot be purchased separately and do not meet the criteria to be considered a performance obligation.

U.S. Government Contracts

Our contracts with the U.S. Government generally include the design, development, manufacture or modification of aerospace and defense products as well as related services.  These contracts, which also include those under the U.S. Government-sponsored foreign military sales program, accounted for approximately 24% of total revenues in 2019.  The customer typically contracts with us to provide a significant service of integrating a complex set of tasks and components into a single project or capability, which often results in the delivery of multiple units.  Accordingly, the entire contract is accounted for as one performance obligation.  In certain circumstances, a contract may include both production and support services, such as logistics and parts plans, which are considered to be distinct in the context of the contract and represent separate performance obligations. When a contract is separated into more than one performance obligation, we generally utilize the expected cost plus a margin approach to determine the standalone selling prices when allocating the transaction price.

Our contracts are frequently modified for changes in contract specifications and requirements.  Most of our contract modifications with the U.S. Government are for goods and services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as part of that existing contract.  The effect of these contract modifications on our estimates is recognized using the cumulative catch-up method of accounting.

Contracts with the U.S. Government generally contain clauses that provide lien rights to work-in-process along with clauses that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work-in-process. Due to the continuous transfer of control to the U.S. Government, we recognize revenue over the time that we perform under the contract.  Selecting the method to measure progress towards completion requires judgment and is based on the nature of the products or service to be provided.  We generally use the cost-to-cost method to measure progress for our contracts because it best depicts the transfer of control to the customer that occurs as we incur costs on our contracts.  Under this measure, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the estimated costs at completion of the performance obligation, and revenue is recorded proportionally as costs are incurred.  

The transaction price for our contracts represents our best estimate of the consideration we will receive and includes assumptions regarding variable consideration as applicable.  Certain of our long-term contracts contain incentive fees or other provisions that can either increase or decrease the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion.  We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.  Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance, historical performance, and all other information that is reasonably available to us.

Total contract cost is estimated utilizing current contract specifications and expected engineering requirements. Contract costs typically are incurred over a period of several years, and the estimation of these costs requires substantial judgment. Our cost estimation process is based on the professional knowledge and experience of engineers and program managers along with finance professionals.  We review and update our projections of costs quarterly or more frequently when circumstances significantly change.  

Approximately 70% of our 2019 revenues with the U.S. Government were under fixed-price and fixed-price incentive contracts.  Under the typical payment terms of these contracts, the customer pays us either performance-based or progress payments. Performance-based payments represent interim payments of up to 90% of the contract price based on quantifiable measures of performance or on the achievement of specified events or milestones. Progress payments are interim payments of up to 80% of costs incurred as the work progresses. Because the customer retains a small portion of the contract price until completion of the contract, these contracts generally result in revenue recognized in excess of billings, which we present as contract assets in the Consolidated Balance Sheets. Amounts billed and due from our customers are classified in Accounts receivable, net. The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer. For cost-type contracts, we are generally paid for our actual costs incurred within a short period of time.

Revenue Recognition for 2017

Prior to the adoption of ASC 606, we generally recognized revenue for the sale of products, which were not under long-term contracts, upon delivery. Commercial aircraft were considered to be delivered upon completion of manufacturing, customer acceptance, and the transfer of the risk and rewards of ownership. When a sale arrangement involved multiple deliverables, such as sales of products that include customization and other services, we evaluated the arrangement to determine whether there were separate items that were required to be delivered under the arrangement that qualify as separate units of accounting. These arrangements typically involved the customization services we offer to customers who purchase Bell helicopters, with the services generally provided within the first six months after customer acceptance of the aircraft and risk of loss  assumption. The aircraft and the customization services were considered to be separate units of accounting and we allocated contract price between the two on a relative selling price basis using the best evidence of selling price for each of the deliverables, typically by reference to the price charged when the same or similar items were sold separately by us. Revenue was then recognized when the recognition criteria for each unit of accounting was met.

Revenues under long-term contracts were accounted for under the percentage-of-completion method of accounting.  Under this method, we estimated profit as the difference between the total estimated revenues and cost of a contract.  We then recognized that estimated profit over the contract term based on either the units-of-delivery method or the cost-to-cost method (which typically was used for development effort as costs were incurred), as appropriate under the circumstances.  Revenues under fixed-price contracts generally were recorded using the units-of-delivery method. Revenues under cost-reimbursement contracts were recorded using the cost-to-cost method.

Finance Revenues

Finance revenues primarily include interest on finance receivables, finance lease earnings and portfolio gains/losses.  Portfolio gains/losses include impairment charges related to repossessed assets and properties and gains/losses on the sale or early termination of finance assets.  We recognize interest using the interest method, which provides a constant rate of return over the terms of the receivables.  Accrual of interest income is suspended if credit quality indicators suggest full collection of principal and interest is doubtful.  In addition, we automatically suspend the accrual of interest income for accounts that are contractually delinquent by more than three months unless collection is not doubtful. Cash payments on nonaccrual accounts, including finance charges, generally are applied to reduce the net investment balance. Once we conclude that the collection of all principal and interest is no longer doubtful, we resume the accrual of interest and recognize previously suspended interest income at the time either a) the loan becomes contractually current through payment according to the original terms of the loan, or b) if the loan has been modified, following a period of performance under the terms of the modification.

Contract Estimates

For contracts where revenue is recognized over time, we recognize changes in estimated contract revenues, costs and profits using the cumulative catch-up method of accounting.  This method recognizes the cumulative effect of changes on current and prior periods with the impact of the change from inception-to-date recorded in the current period.  Anticipated losses on contracts are recognized in full in the period in which the losses become probable and estimable.  

In 2019, 2018 and 2017, our cumulative catch-up adjustments increased segment profit by $91 million, $196 million and $5 million, respectively, and net income by $69 million, $149 million and $3 million, respectively ($0.30, $0.59 and $0.01 per diluted share, respectively). In 2019 and 2018, we recognized revenue from performance obligations satisfied in prior periods of $97 million and $190 million, which related to changes in profit booking rates that impacted revenue.

For 2019, 2018 and 2017, gross favorable adjustments totaled $173 million, $249 million and $92 million, respectively. The 2018 favorable adjustments included $145 million, largely related to overhead rate improvements and risk retirements associated with contracts in the Bell segment. In 2019, 2018 and 2017, gross unfavorable adjustments totaled $82 million, $53 million and $87 million, respectively.

Contract Assets and Liabilities

Contract assets arise from contracts when revenue is recognized over time and the amount of revenue recognized exceeds the amount billed to the customer. These amounts are included in contract assets until the right to payment is no longer conditional on events other than the passage of time and are included in Other current assets in the Consolidated Balance Sheet. Contract liabilities, which are primarily included in Other current liabilities, include deposits, largely from our commercial aviation customers, and billings in excess of revenue recognized.  

The incremental costs of obtaining a contract with a customer that is expected to be recovered is expensed as incurred when the period to be benefitted is one year or less.

Accounts Receivable, Net

Accounts receivable, net includes amounts billed to customers where the right to payment is unconditional.  We maintain an allowance for doubtful accounts to provide for the estimated amount of accounts receivable that will not be collected, which is based on an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivable and collateral value, if any.

Cash and Equivalents

Cash and equivalents consist of cash and short-term, highly liquid investments with original maturities of three months or less.

Inventories

Inventories are stated at the lower of cost or estimated net realizable value.  We value our inventories generally using the first-in, first-out (FIFO) method or the last-in, first-out (LIFO) method for certain qualifying inventories where LIFO provides a better matching of costs and revenues. We determine costs for our commercial helicopters on an average cost basis by model considering the expended and estimated costs for the current production release.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost and are depreciated primarily using the straight-line method.  We capitalize expenditures for improvements that increase asset values and extend useful lives.  Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.  If the carrying value of the asset exceeds the sum of the undiscounted expected future cash flows, the asset is written down to fair value.  

Goodwill and Intangible Assets

Goodwill represents the excess of the consideration paid for the acquisition of a business over the fair values assigned to intangible and other net assets of the acquired business.  Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to an annual impairment test. We evaluate the recoverability of these assets in the fourth quarter of each year or more frequently if events or changes in circumstances, such as declines in sales, earnings or cash flows, or material adverse changes in the business climate, indicate a potential impairment.

For our impairment test, we calculate the fair value of each reporting unit using discounted cash flows.  A reporting unit represents the operating segment unless discrete financial information is prepared and reviewed by segment management for businesses one level below that operating segment, in which case such component is the reporting unit.  In certain instances, we have aggregated components of an operating segment into a single reporting unit based on similar economic characteristics. The discounted cash flows incorporate assumptions for revenue growth, operating margins and discount rates that represent our best estimates of current and forecasted market conditions, cost structure, anticipated net cost reductions, and the implied rate of return that we believe a market participant would require for an investment in a business having similar risks and characteristics to the reporting unit being assessed. The fair value of our indefinite-lived intangible assets is primarily determined using the relief of royalty method based on forecasted revenues and royalty rates. If the estimated fair value of the reporting unit or indefinite-lived intangible asset exceeds the carrying value, there is no impairment. Otherwise, an impairment loss is recognized for the amount by which the carrying value exceeds the estimated fair value.

Acquired intangible assets with finite lives are subject to amortization. These assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.  Amortization of these intangible assets is recognized over their estimated useful lives using a method that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise realized.  Approximately 85% of our gross intangible assets are amortized based on the cash flow streams used to value the assets, with the remaining assets amortized using the straight-line method.

Finance Receivables

Finance receivables primarily include loans provided to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters. Finance receivables are generally recorded at the amount of outstanding principal less allowance for losses.

We maintain an allowance for losses on finance receivables at a level considered adequate to cover inherent losses in the portfolio based on management’s evaluation.  For larger balance accounts specifically identified as impaired, a reserve is established based on comparing the expected future cash flows, discounted at the finance receivable’s effective interest rate, or the fair value of the underlying collateral if the finance receivable is collateral dependent, to its carrying amount. The expected future cash flows consider collateral value; financial performance and liquidity of our borrower; existence and financial strength of guarantors; estimated recovery costs, including legal expenses; and costs associated with the repossession and eventual disposal of collateral. When there is a range of potential outcomes, we perform multiple discounted cash flow analyses and weight the potential outcomes based on their relative likelihood of occurrence. The evaluation of our portfolio is inherently subjective, as it requires estimates, including the amount and timing of future cash flows expected to be received on impaired finance receivables and the estimated fair value of the underlying collateral, which may differ from actual results. While our analysis is specific to each individual account, critical factors included in this analysis include industry valuation guides, age and physical condition of the collateral, payment history and existence and financial strength of guarantors.

We also establish an allowance for losses to cover probable but specifically unknown losses existing in the portfolio.  This allowance is established as a percentage of non-recourse finance receivables, which have not been identified as requiring specific reserves. The percentage is based on a combination of factors, including historical loss experience, current delinquency and default trends, collateral values and both general economic and specific industry trends.

Finance receivables are charged off at the earlier of the date the collateral is repossessed or when no payment has been received for six months, unless management deems the receivable collectible.  Repossessed assets are recorded at their fair value, less estimated cost to sell.

Pension and Postretirement Benefit Obligations

We maintain various pension and postretirement plans for our employees globally.  These plans include significant pension and postretirement benefit obligations, which are calculated based on actuarial valuations.  Key assumptions used in determining these obligations and related expenses include expected long-term rates of return on plan assets, discount rates and healthcare cost projections.  We evaluate and update these assumptions annually in consultation with third-party actuaries and investment advisors.  We also make assumptions regarding employee demographic factors such as retirement patterns, mortality, turnover and rate of compensation increases.

For our year-end measurement, our defined benefit plan assets and obligations are measured as of the month-end date closest to our fiscal year-end. We recognize the overfunded or underfunded status of our pension and postretirement plans in the Consolidated Balance Sheets and recognize changes in the funded status of our defined benefit plans in comprehensive income in the year in which they occur. Actuarial gains and losses that are not immediately recognized as net periodic pension cost are recognized as a component of other comprehensive income (loss) (OCI) and are amortized into net periodic pension cost in future periods.

Derivatives and Hedging Activities

We are exposed to market risk primarily from changes in currency exchange rates and interest rates.  We do not hold or issue derivative financial instruments for trading or speculative purposes.  To manage the volatility relating to our exposures, we net these exposures on a consolidated basis to take advantage of natural offsets.  For the residual portion, we enter into various derivative transactions pursuant to our policies in areas such as counterparty exposure and hedging practices.  Credit risk related to derivative financial instruments is considered minimal and is managed by requiring high credit standards for counterparties and through periodic settlements of positions.

All derivative instruments are reported at fair value in the Consolidated Balance Sheets.  Designation to support hedge accounting is performed on a specific exposure basis.  For financial instruments qualifying as cash flow hedges, we record changes in the fair value of derivatives (to the extent they are effective as hedges) in OCI, net of deferred taxes.  Changes in fair value of derivatives not qualifying as hedges are recorded in earnings.

Foreign currency denominated assets and liabilities are translated into U.S. dollars.  Adjustments from currency rate changes are recorded in the cumulative translation adjustment account in shareholders’ equity until the related foreign entity is sold or substantially liquidated.  We use foreign currency financing transactions to effectively hedge long-term investments in foreign operations with the same corresponding currency.  Foreign currency gains and losses on the hedge of the long-term investments are recorded in the cumulative translation adjustment account.

Leases

We identify leases by evaluating our contracts to determine if the contract conveys the right to use an identified asset for a stated period of time in exchange for consideration. Specifically, we consider whether we can control the underlying asset and have the right to obtain substantially all of the economic benefits or outputs from the asset.  For our contracts that contain both lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) and non-lease components (e.g., common-area maintenance costs, other goods/services), we allocate the consideration in the contract to each component based on its standalone price.  Leases with terms greater than 12 months are classified as either operating or finance leases at the commencement date.  For these leases, we capitalize the lesser of a) the present value of the minimum lease payments over the lease term, or b) the fair value of the asset, as a right-of-use asset with an offsetting lease liability. The discount rate used to calculate the present value of the minimum lease payments is typically our incremental borrowing rate, as the rate implicit in the lease is generally not known or determinable. The lease term includes any noncancelable period for which we have the right to use the asset and may include options to extend or terminate the lease when it is reasonably certain that we will exercise the option.  Operating leases are recognized as a single lease cost on a straight-line basis over the lease term, while finance lease cost is recognized separately as amortization and interest expense.  

Product Liabilities

We accrue for product liability claims and related defense costs when a loss is probable and reasonably estimable.  Our estimates are generally based on the specifics of each claim or incident and our best estimate of the probable loss using historical experience.

Environmental Liabilities and Asset Retirement Obligations

Liabilities for environmental matters are recorded on a site-by-site basis when it is probable that an obligation has been incurred and the cost can be reasonably estimated.  We estimate our accrued environmental liabilities using currently available facts, existing technology, and presently enacted laws and regulations, all of which are subject to a number of factors and uncertainties.  Our environmental liabilities are not discounted and do not take into consideration possible future insurance proceeds or significant amounts from claims against other third parties.

We have incurred asset retirement obligations primarily related to costs to remove and dispose of underground storage tanks and asbestos materials used in insulation, adhesive fillers and floor tiles.  There is no legal requirement to remove these items, and there currently is no plan to remodel the related facilities or otherwise cause the impacted items to require disposal.  Since these asset retirement obligations are not estimable, there is no related liability recorded in the Consolidated Balance Sheets.

Warranty Liabilities

For our assurance-type warranty programs, we estimate the costs that may be incurred and record a liability in the amount of such costs at the time product revenues are recognized.  Factors that affect this liability include the number of products sold, historical costs per claim, length of warranty period, contractual recoveries from vendors and historical and anticipated rates of warranty claims, including production and warranty patterns for new models.  We assess the adequacy of our recorded warranty liability periodically and adjust the amounts as necessary.  Additionally, we may establish a warranty liability related to the issuance of aircraft service bulletins for aircraft no longer covered under the limited warranty programs.

Research and Development Costs

Our customer-funded research and development costs are charged directly to the related contracts, which primarily consist of U.S. Government contracts.  In accordance with government regulations, we recover a portion of company-funded research and development costs through overhead rate charges on our U.S. Government contracts.  Research and development costs that are not reimbursable under a contract with the U.S. Government or another customer are charged to expense as incurred.  Company-funded research and development costs were $647 million, $643 million and $634 million in 2019, 2018 and 2017, respectively, and are included in cost of sales.

Income Taxes

The provision for income tax expense is calculated on reported Income  from continuing operations before income taxes based on current tax law and includes, in the current period, the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Tax laws may require items to be included in the determination of taxable income at different times from when the items are reflected in the financial statements. Deferred tax balances reflect the effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and their tax bases, as well as from net operating losses and tax credit carryforwards, and are stated at enacted tax rates in effect for the year taxes are expected to be paid or recovered.

Deferred tax assets represent tax benefits for tax deductions or credits available in future years and require certain estimates and assumptions to determine whether it is more likely than not that all or a portion of the benefit will not be realized.  The recoverability of these future tax deductions and credits is determined by assessing the adequacy of future expected taxable income from all sources, including the future reversal of existing taxable temporary differences, taxable income in carryback years, estimated future taxable income and available tax planning strategies. Should a change in facts or circumstances lead to a change in judgment about the ultimate recoverability of a deferred tax asset, we record or adjust the related valuation allowance in the period that the change in facts and circumstances occurs, along with a corresponding increase or decrease in income tax expense.  

We record tax benefits for uncertain tax positions based upon management’s evaluation of the information available at the reporting date.  To be recognized in the financial statements, the tax position must meet the more-likely-than-not threshold that the position will be sustained upon examination by the tax authority based on technical merits assuming the tax authority has full knowledge of all relevant information.  For positions meeting this recognition threshold, the benefit is measured as the largest amount of benefit that meets the more-likely-than-not threshold to be sustained. We periodically evaluate these tax positions based on the latest available information.  For tax positions that do not meet the threshold requirement, we recognize net tax-related interest and penalties for continuing operations in income tax expense.

Accounting Pronouncements Not Yet Adopted

In 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses. For most financial assets, such as trade and other receivables, loans and other instruments, this standard changes the current incurred loss model to a forward-looking expected credit loss model, which generally will result in the earlier recognition of allowances for losses.  The new standard is effective for our company at the beginning of 2020.  Entities are required to apply the provisions of the standard through a cumulative-effect adjustment to retained earnings as of the effective date. We completed our evaluation of the standard and determined that the impact on our consolidated financial statements is not significant.

v3.19.3.a.u2
Business Disposition and Acquisition
12 Months Ended
Jan. 04, 2020
Business Disposition and Acquisition  
Business Disposition and Acquisition

Note 2. Business Disposition and Acquisition

On July 2, 2018, we completed the sale of the businesses that manufacture and sell the products in our Tools and Test Equipment product line within our Industrial segment to Emerson Electric Co. for net cash proceeds of $807 million. We recorded an after-tax gain of $419 million related to this disposition.

On March 6, 2017, we completed the acquisition of Arctic Cat Inc. (Arctic Cat), a publicly-held company (NASDAQ: ACAT), pursuant to a cash tender offer for $18.50 per share, followed by a short-form merger. The cash paid for this business, including repayment of debt and net of cash acquired, totaled $316 million.  Arctic Cat was incorporated into our Textron Specialized Vehicles business in the Industrial segment and its operating results have been included in the Consolidated Statements of Operations since the closing date.

v3.19.3.a.u2
Goodwill and Intangible Assets
12 Months Ended
Jan. 04, 2020
Goodwill and Intangible Assets  
Goodwill and Intangible Assets

Note 3. Goodwill and Intangible Assets

Goodwill

The changes in the carrying amount of goodwill by segment are as follows:

Textron

Textron

(In millions)

Aviation

Bell

Systems

Industrial

Total

Balance at December 30, 2017

  $

614

  $

31

  $

1,087

  $

632

  $

2,364

Disposition

(153)

(153)

Acquisition

13

13

Foreign currency translation

 

 

 

 

(6)

 

(6)

Balance at December 29, 2018

 

614

31

1,100

473

2,218

Disposition*

 

 

(71)

 

 

(71)

Acquisition

 

 

 

4

 

 

4

Foreign currency translation

 

 

 

 

(1)

 

(1)

Balance at January 4, 2020

  $

614

  $

31

  $

1,033

  $

472

  $

2,150

*See Note 7 for additional information.

Intangible Assets

Our intangible assets are summarized below:

January 4, 2020

December 29, 2018

Weighted-Average

Gross

Gross

Amortization

Carrying

Accumulated

Carrying

Accumulated

(Dollars in millions)

Period (in years)

Amount

Amortization

Net

Amount

Amortization

Net

Patents and technology

                   14

  $

501

  $

(242)

  $

259

  $

514

  $

(211)

  $

303

Trade names and trademarks

                   14

 

223

 

(8)

 

215

 

224

 

(7)

 

217

Customer relationships and
contractual agreements

                   15

 

413

 

(298)

 

115

 

413

 

(275)

 

138

Other

                     4

 

6

 

(6)

 

 

6

 

(6)

 

Total

  $

1,143

  $

(554)

  $

589

  $

1,157

  $

(499)

  $

658

Trade names and trademarks in the table above include $208 million of indefinite-lived intangible assets at both January 4, 2020 and December 29, 2018. Amortization expense totaled $59 million, $66 million and $69 million in 2019, 2018 and 2017, respectively.  Amortization expense is estimated to be approximately $55 million, $53 million, $54 million, $37 million and $32 million in 2020, 2021, 2022, 2023 and 2024, respectively.

v3.19.3.a.u2
Accounts Receivable and Finance Receivables
12 Months Ended
Jan. 04, 2020
Accounts Receivable and Finance Receivables  
Accounts Receivable and Finance Receivables

Note 4. Accounts Receivable and Finance Receivables

Accounts Receivable

Accounts receivable is composed of the following:

January 4,

December 29,

(In millions)

2020

2018

Commercial

  $

835

  $

885

U.S. Government contracts

 

115

 

166

 

950

 

1,051

Allowance for doubtful accounts

 

(29)

 

(27)

Total

  $

921

  $

1,024

Finance Receivables

Finance receivables are presented in the following table:

January 4,

December 29,

(In millions)

2020

2018

Finance receivables

  $

707

  $

789

Allowance for losses

 

(25)

 

(29)

Total finance receivables, net

  $

682

  $

760

Finance receivables primarily includes loans provided to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters.  These loans typically have initial terms ranging from five to twelve years, amortization terms ranging from eight to fifteen years and an average balance of $1 million at January 4, 2020. Loans generally require the customer to pay a significant down payment, along with periodic scheduled principal payments that reduce the outstanding balance through the term of the loan.

Our finance receivables are diversified across geographic region and borrower industry. At both January 4, 2020 and December 29, 2018, 59% of our finance receivables were distributed internationally and 41% throughout the U.S. At January 4, 2020 and December 29, 2018 finance receivables of $148 million and $201 million, respectively, have been pledged as collateral for TFC’s debt of $87 million and $119 million, respectively.

Finance Receivable Portfolio Quality

We internally assess the quality of our finance receivables based on a number of key credit quality indicators and statistics such as delinquency, loan balance to estimated collateral value and the financial strength of individual borrowers and guarantors.  Because many of these indicators are difficult to apply across an entire class of receivables, we evaluate individual loans on a quarterly basis and classify these loans into three categories based on the key credit quality indicators for the individual loan.  These three categories are performing, watchlist and nonaccrual.

We classify finance receivables as nonaccrual if credit quality indicators suggest full collection of principal and interest is doubtful. In addition, we automatically classify accounts as nonaccrual once they are contractually delinquent by more than three months unless collection of principal and interest is not doubtful. Accounts are classified as watchlist when credit quality indicators have deteriorated as compared with typical underwriting criteria, and we believe collection of full principal and interest is probable but not certain.  All other finance receivables that do not meet the watchlist or nonaccrual categories are classified as performing.

We measure delinquency based on the contractual payment terms of our finance receivables.  In determining the delinquency aging category of an account, any/all principal and interest received is applied to the most past-due principal and/or interest amounts due.  If a significant portion of the contractually due payment is delinquent, the entire finance receivable balance is reported in accordance with the most past-due delinquency aging category.

Finance receivables categorized based on the credit quality indicators and by delinquency aging category are  summarized as follows:

January 4,

December 29,

(Dollars in millions)

2020

2018

Performing

  $

664

  $

704

Watchlist

 

4

 

45

Nonaccrual

 

39

 

40

Nonaccrual as a percentage of finance receivables

 

5.52

%

 

5.07

%

Less than 31 days past due

  $

637

  $

719

31-60 days past due

 

53

 

56

61-90 days past due

 

7

 

5

Over 90 days past due

 

10

 

9

60+ days contractual delinquency as a percentage of finance receivables

2.40

%

1.77

%

On a quarterly basis, we evaluate individual larger balance accounts for impairment.  A finance receivable is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement based on our review of the credit quality indicators described above.  Impaired finance receivables include both nonaccrual accounts and accounts for which full collection of principal and interest remains probable, but the account’s original terms have been, or are expected to be, significantly modified.  If the modification specifies an interest rate equal to or greater than a market rate for a finance receivable with comparable risk, the account is not considered impaired in years subsequent to the modification.

A summary of impaired finance receivables, excluding leveraged leases, and the average recorded investment is provided below:

January 4,

December 29,

(In millions)

2020

2018

Recorded investment:

Impaired loans with related allowance for losses

  $

17

  $

15

Impaired loans with no related allowance for losses

 

22

43

Total

  $

39

  $

58

Unpaid principal balance

  $

50

  $

67

Allowance for losses on impaired loans

 

3

 

5

Average recorded investment

 

40

 

61

A summary of the allowance for losses on finance receivables based on how the underlying finance receivables are evaluated for impairment, is provided below.  The finance receivables reported in this table specifically exclude $104 million and $101 million of leveraged leases at January 4, 2020 and December 29, 2018, respectively, in accordance with U.S. generally accepted accounting principles.

January 4,

December 29,

(In millions)

2020

2018

Allowance based on collective evaluation

  $

22

  $

24

Allowance based on individual evaluation

 

3

 

5

Finance receivables evaluated collectively

564

630

Finance receivables evaluated individually

 

39

 

58

v3.19.3.a.u2
Inventories
12 Months Ended
Jan. 04, 2020
Inventories  
Inventories

Note 5. Inventories

Inventories are composed of the following:

January 4,

December 29,

(In millions)

2020

2018

Finished goods

  $

1,557

  $

1,662

Work in process

 

1,616

 

1,356

Raw materials and components

 

896

 

800

Total

  $

4,069

  $

3,818

Inventories valued by the LIFO method totaled $2.5 billion and $2.2 billion at January 4, 2020 and December 29, 2018, respectively, and the carrying values of these inventories would have been higher by approximately $475 million and $457 million, respectively, had our LIFO inventories been valued at current costs.  

v3.19.3.a.u2
Property, Plant and Equipment, Net
12 Months Ended
Jan. 04, 2020
Property, Plant and Equipment, Net  
Property, Plant and Equipment, Net

Note 6. Property, Plant and Equipment, Net

Our Manufacturing group’s property, plant and equipment, net is composed of the following:

Useful Lives

January 4,

December 29,

(Dollars in millions)

(in years)

2020

2018

Land, buildings and improvements

3-40

  $

1,991

  $

1,927

Machinery and equipment

2-20

 

4,941

 

4,891

 

6,932

 

6,818

Accumulated depreciation and amortization

 

(4,405)

 

(4,203)

Total

  $

2,527

  $

2,615

The Manufacturing group’s depreciation expense, which included amortization expense on finance leases, totaled $346 million, $358 million and $362 million in 2019, 2018 and 2017, respectively.

v3.19.3.a.u2
Other Assets
12 Months Ended
Jan. 04, 2020
Other Assets  
Other Assets

Note 7. Other Assets

On April 1, 2019, TRU Simulation + Training Inc., a business within our Textron Systems segment, contributed assets associated with its training business into FlightSafety Textron Aviation Training LLC, a company formed by FlightSafety International Inc. and TRU to provide training solutions for Textron Aviation’s commercial business and general aviation aircraft.  We have a 30% interest in this newly formed company and our investment is accounted for under the equity method of accounting.  We contributed assets with a carrying value of $69 million to the company, which primarily included property, plant and equipment.  In addition, $71 million of the Textron Systems segment’s goodwill was allocated to this transaction.  Based on the fair value of our share of the business, we recorded a pre-tax net gain of $18 million in 2019 to cost of sales in our Consolidated Statements of Operations.

v3.19.3.a.u2
Other Current Liabilities
12 Months Ended
Jan. 04, 2020
Other Current Liabilities  
Other Current Liabilities

Note 8. Other Current Liabilities

The other current liabilities of our Manufacturing group are summarized below:

January 4,

December 29,

(In millions)

2020

2018

Contract liabilities

  $

715

  $

876

Salaries, wages and employer taxes

 

362

 

381

Current portion of warranty and product maintenance liabilities

 

147

 

177

Other

 

683

 

715

Total

  $

1,907

  $

2,149

Changes in our warranty liability are as follows:

(In millions)

2019

2018

2017

Balance at beginning of year

  $

149

  $

164

  $

138

Provision

 

68

 

72

 

81

Settlements

 

(70)

 

(78)

 

(69)

Acquisitions

 

 

1

 

35

Adjustments*

 

(6)

 

(10)

 

(21)

Balance at end of year

  $

141

  $

149

  $

164

* Adjustments include changes to prior year estimates, new issues on prior year sales, business dispositions and currency translation adjustments.

v3.19.3.a.u2
Leases
12 Months Ended
Jan. 04, 2020
Leases  
Leases

Note 9.  Leases

We primarily lease certain manufacturing plants, offices, warehouses, training and service centers at various locations worldwide that are classified as either operating or finance leases. Our leases have remaining lease terms up to 30 years, which include options to extend the lease term for periods up to 25 years when it is reasonably certain the option will be exercised.  In 2019, our operating lease cost totaled $64 million. Our finance lease cost and our variable and short-term lease costs were not significant. Cash paid for operating lease liabilities during 2019 totaled $62 million, which is classified in cash flows from operating activities.  Balance sheet and other information related to our leases is as follows:  

January 4,

(Dollars in millions)

2020

Operating leases:

  

Other assets

  $

277

Other current liabilities

 

48

Other liabilities

 

233

Finance leases:

 

  

Property, plant and equipment, less accumulated amortization of $8 million

  $

39

Current portion of long-term debt

 

2

Long-term debt

 

40

Weighted-average remaining lease term (in years)

 

  

Finance leases

 

17.9

Operating leases

 

10.2

Weighted-average discount rate

 

  

Finance leases

 

4.37

%

Operating leases

 

4.42

%

At December 29, 2018, assets under finance leases totaled $168 million and had accumulated amortization of $47 million.

Maturities of our lease liabilities at January 4, 2020 are as follows:

Operating

Finance

(In millions)

Leases

Leases

2020

  $

57

  $

4

2021

 

48

 

4

2022

 

40

 

4

2023

 

32

 

4

2024

 

25

 

5

Thereafter

 

154

 

46

Total lease payments

 

356

 

67

Less: interest

 

(75)

 

(25)

Total lease liabilities

  $

281

  $

42

v3.19.3.a.u2
Debt and Credit Facilities
12 Months Ended
Jan. 04, 2020
Debt and Credit Facilities  
Debt and Credit Facilities

Note 10. Debt and Credit Facilities

Our debt is summarized in the table below:

January 4,

December 29,

(In millions)

2020

2018

Manufacturing group

7.25% due 2019

  $

  $

250

6.625% due 2020

 

199

 

190

Variable-rate notes due 2020 (2.45% and 3.17%, respectively)

350

350

3.65% due 2021

 

250

 

250

5.95% due 2021

250

250

4.30% due 2024

350

350

3.875% due 2025

350

350

4.00% due 2026

350

350

3.65% due 2027

350

350

3.375% due 2028

300

300

3.90% due 2029

300

Other (weighted-average rate of 3.01% and 2.63%, respectively)

 

75

 

76

Total Manufacturing group debt

  $

3,124

  $

3,066

Less: Current portion of long-term debt

 

(561)

 

(258)

Total Long-term debt

  $

2,563

  $

2,808

Finance group

Variable-rate note due 2020 (2.87% and 3.57%, respectively)

  $

150

  $

150

2.88% note due 2022

150

150

Fixed-rate notes due 2019-2028 (weighted-average rate of 3.20% and 3.17%, respectively) (a) (b)

 

65

 

84

Variable-rate notes due 2019-2027 (weighted-average rate of 3.31% and 3.99%, respectively) (a) (b)

 

22

 

35

Fixed-to-Floating Rate Junior Subordinated Notes (3.64% and 4.35%, respectively)

 

299

 

299

Total Finance group debt

  $

686

  $

718

(a)Notes amortize on a quarterly or semi-annual basis.
(b)Notes are secured by finance receivables as described in Note 4.

The following table shows required payments during the next five years on debt outstanding at January 4, 2020:

(In millions)

2020

2021

2022

2023

2024

Manufacturing group

  $

561

  $

507

  $

7

  $

7

  $

361

Finance group

 

167

 

14

 

167

 

17

 

15

Total

  $

728

  $

521

  $

174

  $

24

  $

376

On October 18, 2019, Textron entered into a senior unsecured revolving credit facility for an aggregate principal amount of $1.0 billion, of which up to $100 million is available for the issuance of letters of credit. Textron may elect to increase the aggregate amount of commitments under the facility to up to $1.3 billion by designating an additional lender or by an existing lender agreeing to increase its commitment. The facility expires in October 2024, subject to up to two one-year extensions at Textron's option with the consent of lenders representing a majority of the commitments under the facility. This new facility replaced the prior 5-year facility, which was scheduled to expire in September 2021. At January 4, 2020 and December 29, 2018, there were no amounts borrowed against either facility. At January 4, 2020, there were $10 million of outstanding letters of credit issued under the new facility and at December 29, 2018, there were $10 million of outstanding letters of credit issued under the prior facility.

Fixed-to-Floating Rate Junior Subordinated Notes

The Finance group’s $299 million of Fixed-to-Floating Rate Junior Subordinated Notes are unsecured and rank junior to all of its existing and future senior debt. The notes mature on February 15, 2067; however, we have the right to redeem the notes at par at any time and we are obligated to redeem the notes beginning on February 15, 2042.  Interest on the notes was fixed at 6% through February 15, 2017 and is now variable at the three-month London Interbank Offered Rate + 1.735%.

Support Agreement

Under a Support Agreement, as amended in December 2015, Textron Inc. is required to ensure that TFC maintains fixed charge coverage of no less than 125% and consolidated shareholder’s equity of no less than $125 million. There were no cash contributions required to be paid to TFC in 2019, 2018 and 2017 to maintain compliance with the support agreement.

v3.19.3.a.u2
Derivative Instruments and Fair Value Measurements
12 Months Ended
Jan. 04, 2020
Derivative Instruments and Fair Value Measurements  
Derivative Instruments and Fair Value Measurements

Note 11. Derivative Instruments and Fair Value Measurements

We measure fair value at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  We prioritize the assumptions that market participants would use in pricing the asset or liability into a three-tier fair value hierarchy.  This fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets or liabilities and the lowest priority (Level 3) to unobservable inputs in which little or no market data exist, requiring companies to develop their own assumptions.  Observable inputs that do not meet the criteria of Level 1, which include quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets and liabilities in markets that are not active, are categorized as Level 2.  Level 3 inputs are those that reflect our estimates about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances.  Valuation techniques for assets and liabilities measured using Level 3 inputs may include methodologies such as the market approach, the income approach or the cost approach and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data.  These unobservable inputs are utilized only to the extent that observable inputs are not available or cost effective to obtain.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

We manufacture and sell our products in a number of countries throughout the world, and, therefore, we are exposed to movements in foreign currency exchange rates.  We primarily utilize foreign currency exchange contracts with maturities of no more than three years to manage this volatility.  These contracts qualify as cash flow hedges and are intended to offset the effect of exchange rate fluctuations on forecasted sales, inventory purchases and overhead expenses. Net gains and losses recognized in earnings and Accumulated other comprehensive loss on cash flow hedges, including gains and losses related to hedge ineffectiveness, were not significant in the periods presented.  

Our foreign currency exchange contracts are measured at fair value using the market method valuation technique.  The inputs to this technique utilize current foreign currency exchange forward market rates published by third-party leading financial news and data providers.  These are observable data that represent the rates that the financial institution uses for contracts entered into at that date; however, they are not based on actual transactions so they are classified as Level 2. At January 4, 2020 and December 29, 2018, we had foreign currency exchange contracts with notional amounts upon which the contracts were based of $342 million and $379 million, respectively. At January 4, 2020, the fair value amounts of our foreign currency exchange contracts were a $2 million asset and a $2 million liability.  At December 29, 2018, the fair value amounts of our foreign currency exchange contracts were a $2 million asset and a $10 million liability.

We hedge our net investment position in  certain major currencies and generate foreign currency interest payments that offset other transactional exposures in these currencies. To accomplish this, we borrow directly in the foreign currency and designate a portion of the debt as a hedge of the net investment. We record changes in the fair value of these contracts in other comprehensive income to the extent they are effective as cash flow hedges.  Currency effects on the effective portion of these hedges, which are reflected in the foreign currency translation adjustments within Accumulated other comprehensive loss, were not significant in the periods presented.

Assets and Liabilities Not Recorded at Fair Value

The carrying value and estimated fair value of our financial instruments that are not reflected in the financial statements at fair value are as follows:

January 4, 2020

December 29, 2018

Carrying

Estimated

Carrying

Estimated

(In millions)

Value

Fair Value

Value

Fair Value

Manufacturing group

Debt, excluding leases

  $

(3,097)

  $

(3,249)

  $

(2,996)

  $

(2,971)

Finance group

Finance receivables, excluding leases

 

493

 

527

 

582

 

584

Debt

 

(686)

 

(634)

 

(718)

 

(640)

Fair value for the Manufacturing group debt is determined using market observable data for similar transactions (Level 2).  The fair value for the Finance group debt was determined primarily based on discounted cash flow analyses using observable market inputs from debt with similar duration, subordination and credit default expectations (Level 2).  Fair value estimates for finance receivables were determined based on internally developed discounted cash flow models primarily utilizing significant unobservable inputs (Level 3), which include estimates of the rate of return, financing cost, capital structure and/or discount rate expectations of current market participants combined with estimated loan cash flows based on credit losses, payment rates and expectations of borrowers’ ability to make payments on a timely basis.

v3.19.3.a.u2
Shareholders' Equity
12 Months Ended
Jan. 04, 2020
Shareholders' Equity  
Shareholders' Equity

Note 12. Shareholders’ Equity

Capital Stock

We have authorization for 15 million shares of preferred stock with a par value of $0.01 and 500 million shares of common stock with a par value of $0.125.  Outstanding common stock activity is presented below:

(In thousands)

2019

2018

2017

Balance at beginning of year

235,621

261,471

270,287

Share repurchases

(10,011)

(29,094)

(11,917)

Share-based compensation activity

2,346

3,244

3,101

Balance at end of year

227,956

235,621

261,471

Earnings Per Share

We calculate basic and diluted earnings per share (EPS) based on net income, which approximates income available to common shareholders for each period.  Basic EPS is calculated using the two-class method, which includes the weighted-average number of common shares outstanding during the period and restricted stock units to be paid in stock that are deemed participating securities as they provide nonforfeitable rights to dividends.  Diluted EPS considers the dilutive effect of all potential future common stock, including stock options.

The weighted-average shares outstanding for basic and diluted EPS are as follows:

(In thousands)

2019

2018

2017

Basic weighted-average shares outstanding

231,315

250,196

266,380

Dilutive effect of stock options

1,394

3,041

2,370

Diluted weighted-average shares outstanding

232,709

253,237

268,750

In 2019, 2018 and 2017, stock options to purchase 4.3 million, 1.3 million and 1.6 million shares, respectively, of common stock are excluded from the calculation of diluted weighted-average shares outstanding as their effect would have been anti-dilutive.

Accumulated Other Comprehensive Loss

The components of Accumulated other comprehensive loss are presented below:

Pension and

Foreign

Deferred

Accumulated

Postretirement

Currency

Gains (Losses)

Other

Benefits

Translation

on Hedge

Comprehensive

(In millions)

Adjustments

Adjustments

Contracts

Loss

Balance at December 30, 2017

  $

(1,396)

  $

11

  $

10

  $

(1,375)

Other comprehensive loss before reclassifications

 

(198)

 

(49)

 

(8)

 

(255)

Reclassified from Accumulated other comprehensive loss

124

 

6

 

(5)

 

125

Reclassification of stranded tax effects

 

(257)

(257)

Balance at December 29, 2018

  $

(1,727)

  $

(32)

  $

(3)

  $

(1,762)

Other comprehensive loss before reclassifications

 

(166)

 

(4)

 

5

 

(165)

Reclassified from Accumulated other comprehensive loss

 

82

 

 

(2)

 

80

Balance at January 4, 2020

  $

(1,811)

  $

(36)

  $

  $

(1,847)

In 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows entities to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act  from accumulated other comprehensive loss to retained earnings. The stranded tax effects are comprised of the tax amounts included in accumulated other comprehensive loss at the previous U.S. federal corporate tax rate of 35%, for which the related deferred tax asset or liability was remeasured at the new U.S. federal corporate tax rate of 21% in the fourth quarter of 2017. The adoption of this standard resulted in an increase to accumulated other comprehensive loss of $257 million, with an offsetting increase to retained earnings.

Other Comprehensive Income (Loss)

The before and after-tax components of other comprehensive income (loss) are presented below:

2019

2018

2017

Tax

After-

Tax

After-

Tax

After-

Pre-Tax

(Expense)

Tax

Pre-Tax

(Expense)

Tax

Pre-Tax

(Expense)

Tax

(In millions)

Amount

Benefit

Amount

Amount

Benefit

Amount

Amount

Benefit

Amount

Pension and postretirement benefits adjustments:

Unrealized gains (losses)

  $

(218)

  $

52

  $

(166)

  $

(248)

  $

58

  $

(190)

  $

18

  $

(1)

  $

17

Amortization of net actuarial loss*

 

99

 

(23)

 

76

 

152

 

(35)

 

117

 

136

 

(48)

 

88

Amortization of prior service cost*

 

8

 

(2)

 

6

 

9

 

(2)

 

7

 

7

 

(2)

 

5

Recognition of prior service cost

 

 

 

 

(20)

 

5

 

(15)

 

(1)

 

 

(1)

Business disposition

7

7

Pension and postretirement benefits adjustments, net

 

(111)

 

27

 

(84)

 

(100)

 

26

 

(74)

 

160

 

(51)

 

109

Foreign currency translation adjustments:

Foreign currency translation adjustments

(6)

2

(4)

(46)

(3)

(49)

100

7

107

Business disposition

6

6

Foreign currency translation adjustments, net

 

(6)

 

2

 

(4)

 

(40)

 

(3)

 

(43)

 

100

 

7

 

107

Deferred gains (losses) on hedge contracts:

Current deferrals

 

8

 

(3)

 

5

 

(8)

 

 

(8)

 

10

 

(2)

 

8

Reclassification adjustments

 

(2)

 

 

(2)

 

(7)

 

2

 

(5)

 

7

 

(1)

 

6

Deferred gains (losses) on hedge
contracts, net

 

6

 

(3)

 

3

 

(15)

 

2

 

(13)

 

17

 

(3)

 

14

Total

  $

(111)

  $

26

  $

(85)

  $

(155)

  $

25

  $

(130)

  $

277

  $

(47)

  $

230

* These components of other comprehensive income (loss) are included in the computation of net periodic pension cost. See Note 16 for additional information.

v3.19.3.a.u2
Segment and Geographic Data
12 Months Ended
Jan. 04, 2020
Segment and Geographic Data  
Segment and Geographic Data

Note 13. Segment and Geographic Data

We operate in, and report financial information for, the following five business segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance.  The accounting policies of the segments are the same as those described in Note 1.

Textron Aviation products include Citation jets, King Air and Caravan turboprop aircraft, piston engine aircraft, military trainer and defense aircraft, and aftermarket part sales and services sold to a diverse base of corporate and individual buyers.

Bell products include military and commercial helicopters, tiltrotor aircraft and related spare parts and services.  Bell supplies military helicopters and, in association with The Boeing Company, military tiltrotor aircraft, and aftermarket services to the U.S. and non-U.S. governments.  Bell also supplies commercial helicopters and aftermarket services to corporate, offshore petroleum exploration and development, utility, charter, police, fire, rescue and emergency medical helicopter operators, and foreign governments.

Textron Systems products include unmanned aircraft and surface systems, marine craft, armored vehicles and specialty vehicles, advanced flight training devices and other defense and aviation mission support products and services primarily for U.S. and non-U.S. governments.

Industrial products and markets include the following:

Kautex products consist of blow-molded plastic fuel systems, including conventional plastic fuel tanks and pressurized fuel tanks for hybrid applications, clear-vision systems  and plastic tanks for  selective catalytic reduction systems that are marketed primarily to automobile OEMs; and
Specialized Vehicles products include golf cars, off-road utility vehicles, recreational side-by-side and all-terrain vehicles, snowmobiles, light transportation vehicles, aviation ground support equipment, professional turf-maintenance equipment and turf-care vehicles that are marketed primarily to golf courses and resorts, government agencies and municipalities, consumers, outdoor enthusiasts, and commercial and industrial users.

On July 2, 2018, we sold our Tools and Test Equipment businesses that were previously included in the Industrial segment as discussed in Note 2.

The Finance segment provides financing primarily to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters.

Segment profit is an important measure used for evaluating performance and for decision-making purposes.  Segment profit for the manufacturing segments excludes interest expense, certain corporate expenses, gains/losses on major business dispositions and special charges.  The measurement for the Finance segment includes interest income and expense along with intercompany interest income and expense.

Our revenues by segment, along with a reconciliation of segment profit to income from continuing operations  before income taxes, are as follows:

Revenues

Segment Profit

(In millions)

2019

2018

2017

2019

2018

2017

Textron Aviation

  $

5,187

  $

4,971

  $

4,686

  $

449

  $

445

  $

303

Bell

 

3,254

 

3,180

 

3,317

 

435

 

425

 

415

Textron Systems

 

1,325

 

1,464

 

1,840

 

141

 

156

 

139

Industrial

 

3,798

 

4,291

 

4,286

 

217

 

218

 

290

Finance

 

66

 

66

 

69

 

28

 

23

 

22

Total

  $

13,630

  $

13,972

  $

14,198

  $

1,270

  $

1,267

  $

1,169

Corporate expenses and other, net

 

(110)

 

(119)

 

(132)

Interest expense, net for Manufacturing group

 

(146)

 

(135)

 

(145)

Special charges

(72)

(73)

(130)

Gain on business disposition

444

Income from continuing operations before income taxes

  $

942

  $

1,384

  $

762

Other information by segment is provided below:

Assets

Capital Expenditures

Depreciation and Amortization

January 4,

December 29,

(In millions)

2020

2018

2019

2018

2017

2019

2018

2017

Textron Aviation

  $

4,692

  $

4,290

  $

122

  $

132

  $

128

  $

137

  $

145

  $

139

Bell

 

2,783

 

2,652

 

81

 

65

 

73

 

107

 

108

 

117

Textron Systems

 

2,352

 

2,254

 

38

 

39

 

60

 

48

 

54

 

65

Industrial

 

2,781

 

2,815

 

97

 

132

 

158

 

108

 

112

 

105

Finance

 

964

 

1,017

 

 

 

 

6

 

8

 

12

Corporate

 

1,446

 

1,236

 

1

 

1

 

4

 

10

 

10

 

9

Total

  $

15,018

  $

14,264

  $

339

  $

369

  $

423

  $

416

  $

437

  $

447

Geographic Data

Presented below is selected financial information of our continuing operations by geographic area:

Property, Plant

Revenues*

and Equipment, net**

January 4,

December 29,

(In millions)

2019

2018

2017

2020

2018

United States

  $

8,963

  $

8,667

  $

8,786

  $

2,054

  $

2,115

Europe

 

1,986

 

2,187

 

1,962

 

244

 

267

Asia and Australia

 

1,070

 

1,253

 

1,206

 

97

 

88

Other international

1,611

1,865

2,244

132

145

Total

  $

13,630

  $

13,972

  $

14,198

  $

2,527

  $

2,615

*   Revenues are attributed to countries based on the location of the customer.

** Property, plant and equipment, net is based on the location of the asset.

v3.19.3.a.u2
Revenues
12 Months Ended
Jan. 04, 2020